Much Ado About Streaming: Why Free Listening Isn't Dead

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The controversy over free streaming is reaching a boiling point reminiscent of the fever pitch before the turn of the millennium, or the end of the Mayan calendar in 2012. Free streaming is being portrayed, by some, as the end of the music business.

Start with the latest articles to feature anonymous quotes from label sources, yesterday (Mar. 22) in the Financial Times ("Streaming sets off a painful debate in the music industry") and Friday (Mar. 20) at Rolling Stone ("'We Need To Limit Free': Major Labels Begin to Question Spotify Model"). A Billboard article earlier in the month had the same comments from industry sources; labels have changed their opinions on unlimited free streaming and have become more vocal about their desire for subscription services to turn free listeners into paying customers.

The timing of these articles' publications isn't a coincidence. The Financial Times' work seemed to suggest Spotify is currently in licensing negotiations and might not renew some contracts. "Now the record companies have weighed in, led by Vivendi's Universal music label, arguing that the company's free service is not sufficiently distinct from what customers pay for. They have real clout: their catalogue licenses are up for renegotiation and without permission to use them, Spotify has nothing to sell," the article says.

That particular calendar comes to an end this summer, when Spotify's deals with major labels are likely to expire in the United States. Spotify launched in the United States in July of 2011. Whether Spotify and the labels had two-year deals or four-year deals, the contracts would need to be renewed at that time.

An entertainment attorney familiar with these types of contracts believes labels have four-year deals with Spotify. "The labels could have had a two-year contract butm because they're equity holders, they may have given Spotify more running room. That's why the deals are four years," he tells Billboard.

No industry sources Billboard has spoken with believe free streaming will disappear from subscription services. They do believe that labels could force Spotify to end unlimited free streaming, and demand minimum guarantees rather than a revenue share on ad-supported streams.

The largest label, Universal Music Group, is reassessing its digital strategy. Rob Wells, the president of the global digital business team that negotiated the freemium deals now being scrutinized, and executive vp has departed the company. "There are no regrets about initially supporting that business model," says one UMG insider. "But it's time to figure out how to drive up the value of our content."

And while labels certainly have leverage -- after all, they have the content -- Spotify has leverage, too. It has biggest subscription market share and is driving the most growth in streaming revenue. Most significantly, Spotify has 15 million subscribers. Labels may be disappointed with that number, but the next-best competitor, Deezer, has 6 million -- and although it has escaped criticism, it also uses a freemium model. (Deezer will need to update that number once it has migrated some Muve Music customers following its acquisition.)

It may be loathed, but the freemium model has put up the best numbers. Apple's pay-only model, to be unleashed some time this year, has the best chance to prove a pay-only model can scale.